On 20 May 2017, changes to section 13 of the Personal Property Securities Act 2009 (PPSA) came into effect which could help to significantly reduce the administrative burden that the PPSA may have created for small- and medium-sized hire and rental businesses. The news is likely to be welcome relief for businesses that enter into leases for an unspecified period and which usually run for less than two years.

What has changed?

The changes extend the minimum duration of a PPS lease from more than one year to more than two years. In addition, a lease or bailment of goods for an indefinite period will no longer be deemed to be a PPS lease unless and until it runs for a period of more than two years.

Recap: what is a PPS lease?

Prior to the commencement of the PPSA, merely passing possession of goods on lease or hire did not transfer ownership, nor did it create a security interest. This caused problems for innocent third parties because these types of arrangements could allow the person in possession of property (eg. a lessee or bailee) to maintain the outward appearance of ownership. The PPSA fundamentally changed the ownership rules relating to leases and bailments and introduced the concept of a "PPS lease".

A PPS lease is a lease or bailment of goods that is treated under the PPSA as creating a security interest in the goods leased or bailed when the arrangement is for a term or terms of two years or more (the new minimum period under the new changes). Registration of a security interest arising under a PPS lease provides notice of the owner's legal interest in the goods while it is in the possession of the lessee or bailee. On the other hand, failure to register an interest can result in the owner losing title or priority in the goods.

Example

On 26 May 2017, Rental Company enters into a lease of portable buildings with Customer for a term of three years. Under the PPSA, Rental Company is treated as having a security interest in the buildings, but it elects not to register its interest on the Personal Property Securities Register (PPSR). Customer subsequently grants a security interest over all its assets (including its interest in the portable buildings) to Lender. Lender registers a security interest on the PPSR. Twelve months later a receiver is appointed to Customer. Although Rental Company holds legal title to the portable building, Lender's registered security interest has priority over Rental Company's unregistered interest.

In the above example, if the lease had been for a term of less than two years, then it would now not be subject to the application of the PPSA and accordingly the Rental Company would not have had a security interest that was required to be registered over the portable buildings.

What is not a PPS lease?

From 20 May 2017, the definition of a PPS lease will no longer apply to leases and bailments for a total length of less than two years. Previously, the minimum period for a lease or bailment to qualify as a PPS lease was an indefinite period or a term or terms of one year or more.

The PPSA also excludes the following arrangements:

  • a lease or bailment if the lessor or bailor is not regularly engaged in the business of leasing or bailing goods;
  • a lease of consumer property as part of a lease of land where the property is incidental to the use of land;
  • in the case of bailments, the bailee does not provide value (eg. by way of payment) in exchange for possession of the goods.

How does the change affect existing PPS leases, and your registration procedures?

Importantly, the changes only apply to leases and bailments entered into on and after 20 May 2017. The previous law will continue to apply to leases and bailment arrangements entered into before this date. For example, a lease of goods entered into on 1 January 2017 for a term of 18 months will continue to be deemed to be a PPS lease even though it was entered into for a term of less than two years.

Hiring and rental businesses should check their existing procedures for registering security interests on the PPSR against leased or bailed goods in light of the changes outlined above. If you are not sure whether the changes affect your business, please feel free to get in touch for guidance on the issue.